The top 10 Family Finance questions of 2012

When times are tough, troubles come out of the woodwork and, true to the rule, 2012 was no exception. In hundreds of letters to Family Finance requesting assistance and commenting on the problems folks face in paying their bills, 10 top issues emerged:

Debt When interest rates rise, as they surely will one day, a 1.0% interest rate increase on a home equity line of credit will turn a $100,000 interest-only loan floating at 3.5% or $3,500 a year to a heftier $4,500 a year. Cash cushions will disappear. People may have to cut savings or even trim spending on food and clothing. Rates have been held down by the Bank of Canada since 2010 and major gains in rates become more likely as time moves on. For Family Finance, paying the bills was the top issue of the year.

Tax shelters Inability to make the most of RRSPs, RESPs, TFSAs and, for those who qualify, Registered Disability Savings Plans (RDSPs) spurred many readers to ask how they could sock away more money and which choices in the alphabet soup of these plans would be most tax efficient. The answer, which depends on balancing tax rates now and in future in the case of RRSPs and TFSAs, on the government bonuses that provide instantaneous gains for qualifying contributions to RESPs, and on complex interpretations of what is a disability, confuse readers and challenge financial planners.

Almost every case Family Finance profiled in 2012 had concerns about tax-sheltered savings.

Related

Downsizing Family transition from children to empty nests and the need to raise cash for retirement spending came up in more than half of our cases. The amount of money that can be raised or the amount of debt that can be liberated depends on the market price of a home or cottage. Where prices are very high — think Vancouver, Victoria, Calgary and Toronto — readers sensed that they could take a profit over cost, especially if they had owned the home for many years, pay debts and have cash left over for a smaller home or for renting. Interestingly, almost no readers asked about reverse mortgages, which tend to have high built-in interest rates compounding until a home is sold, and which tend to eat the legacies that the owners might want to leave to family or charities.

Children Couples and those expecting a first child wrote in dozens of cases to ask what is the cost of raising a child. A 2011 study by the Manitoba Department of Agriculture suggested that a child born in 2010 would set its parents back by $191,665. U.S. costs were $226,920, though 18 years of inflation would drive the price up to US$286,680.

In a larger sense, there is no answer, for a child may go to subsidized daycare or have the luck to have been born to parents who can lay out $50,000 a year or more for nannies when kids are in prams, and twice that for Swiss lycées for languages and polish.

Boundaries It is one thing to know the statistics of child-rearing expense and another to manage it. Readers asked many times how much they could afford to give their kids for RESPs and for activities while at home. It was common to find cases in which parents, strapped for money, spent $400 to $500 a month for sports yet could have cut down on hockey and put enough money into RESPs to qualify for maximum government grants.

Indulgences included foreign travel with parents and money for cars for teenagers.

When the parents wound up strapped for cash, it was clear that they had failed to set boundaries on what they would spend and what they might ask their older children to earn to support their sports, hobbies and travel.

Limits to portfolio growth Implicit in almost every letter requesting financial advice was the assumption that years of saving and investing should have produced larger gains with lower volatility than what folks experienced. Part of the problem is that mutual fund and other financial product advertising showcases returns in hot years of 20% or 30% gains. The fine print in the ads points out that past returns are not an assurance of future performance, which is true. Reason: What goes up a lot also tends to go down a lot when reversion to the mean takes over. The problem embedded in false expectations is inability to recognize the limits to growth. Data show stocks have generated a 6.8% average annual compound return for the past two centuries while government bonds produced a 3.5% average annual return in the same period. If management fees of just 1% (they are often more) are taken off fund returns, annual compound returns drop to 5.8% and 2.5%. That is reality.

Understanding risk Asked a reader in Alberta with a $250,000 annual household income 65% of which goes to pay for real estate investments that are not worth what he paid for them and do not generate sufficient rent to cover even interest costs: “How did this happen?” The answer is that he assumed that property prices would rise, that the market would sustain rents, and that he could make a handsome gain. When condo prices fell in an overbuilt part of the market, speculators who wanted out bid each other down. Rents fell as some owners chose to keep their plummeting condos and find tenants. Houses and condos can’t be sold in slices, so it’s dump ’em or rent ’em. Landlords face risks of rising property taxes, rising interest rates, vacancy, tenant damage and adverse neighbourhood change. When readers suffer losses they cannot stem, they learn a painful lesson on how fate treats those who don’t compare what can happen in the future with what has happened in the recent past. Survivors plan for risk.

Insurance Virtually every reader has insurance for his home and car, but life insurance is another matter. A third of our readers need more insurance than they have to cover the risk that the single breadwinner in a family could die prematurely. Another third have inappropriate coverage with costly whole life that builds cash value slowly, or universal life they (and many financial analysts) can’t understand. The remainder need to adjust their coverage up or down with how their lives have changed. The math within life insurance is complex, the tax breaks that life insurance can afford are valuable, and the protection against many creditor claims life insurance can provide are precious, but very few readers understand how intricate a product life insurance is.

Retirement age A generation of readers grew up aspiring to retire at age 55. Two-thirds of the letters to Family Finance raise the question of how they can get enough money to retire then or a little later. Today, the mid-50s goal is so 1980 — before the crashes of the dot-coms, 9/11 and the 2008 debt crisis. In fact, few readers have sufficient capital to make it at 55. Instead, working another decade to 65 or even to 67 when, under revised rules, Old Age Security begins for people born later than 1955, is necessary. Working longer not only allows more savings, it postpones the time that retirees have to start drawing down their capital. Working longer also provides a reason to get up in the morning, maintains associations, and even sustains credit ratings. Full retirement at 55 is an idea whose time has come and gone for most.

Make a budget Many requests to Family Finance ask for help making a budget. Readers regard having a set of rules as a key to meeting savings goals for their kids and retirement. Where cash is tight, a set of rules for the road is surely a good idea. Just thinking about what categories of spending should have various allocations each month is helpful. Mundane it may be, but writing a budget can be a first step to sound family finance.

Personal Finance Videos

Sponsored by Heritage Education Funds

RESP is produced by Postmedia’s advertising department on behalf of Heritage Education Funds for commercial purposes. Postmedia’s editorial departments have no involvement in the creation of this content.